The term business risk refers to the possibility of inadequate profits or even losses due to uncertainties e.g., changes in tastes, preferences of consumers, strikes, increased competition, change in government policy, obsolescence etc .Every business organization contains various risk elements while doing the business. Business risks implies uncertainty in profits or danger of loss and the events that could pose a risk due to some unforeseen events in future, which causes business to fail.
For example, an owner of a business may face different risks like in production,risks due to irregular supply of raw materials, machinery breakdown, labor unrest, etc. In marketing, risks may arise due to different market price fluctuations, changing trends and fashions, error in sales forecasting, etc. In addition, there may be loss of assets of the firm due to fire, flood, earthquakes, riots or war and political unrest which may cause unwanted interruptions in the business operations. Thus business risks may take place in different forms depending upon the nature and size of the business.
Business risks can arise due to the influence by two major risks: internal risks (risks arising from the events taking place within the organization) and external risks (risks arising from the events taking place outside the organization).
Internal risks arise from factors (endogenous variables, which can be controlled) such as human factors (talent management, strikes), technological factors (emerging technologies), physical factors (failure of machines, fire or theft), operational factors (access to credit, cost cutting, advertisement). External risks arise from factors (exogenous variables, which cannot be controlled) such as economic factors (market risks, pricing pressure), natural factors (floods, earthquakes), political factors (compliance and regulations of government).
The Business risk is classified into different 5 main types
- Strategic Risk: They are the risks associated with the operations of that particular industry.These kind of risks arise from
- Business Environment: Buyers and sellers interacting to buy and sell goods and services, changes in supply and demand, competitive structures and introduction of new technologies.
- Transaction: Assets relocation of mergers and acquisitions, spin-offs, alliances and joint ventures.
- Investor Relations: Strategy for communicating with individuals who have invested in the business.
- Financial Risk: These are the risks associated with the financial structure and transactions of the particular industry.
- Operational Risk: These are the risks associated with the operational and administrative procedures of the particular industry.
- Compliance Risk(Legal Risk): These are risks associated with the need to comply with the rules and regulations of the government.
- Other risks: There would be different risks like natural disaster(floods) and others depend upon the nature and scale of the industry.
- "Business Risks".
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- "Investopedia ,definition".
- "influencing types of business risk".
Influencing factors types in Business Risk
- Miles, D.Anthony (2011). Risk Factors and Business Models: Understanding the Five Forces of Entrepreneurial Risk and the Causes of Business Failure. dissertation.com. p. 1. ISBN 978-1-59942-388-3.
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Factors in Business Risk
- Jolly, Adam (2003). Managing Business Risk: A Practical Guide to Protecting Your Business. Kogan Page Limited. pp. 6–7. ISBN 0-7494-4081-3.
Types of Business Risks